Economics Chapter 5 Review

Front 1

Utility-

Back 1

The pleasure, satisfaction, or need fulfillment that people obtain from the consumption of goods and services.

Front 2

What are the three most important constraints on opportunities?

Back 2

-Limits on the types of goods available
-Prices of those goods
-The size of the consumer's budget.

Front 3

Marginal utility-

Back 3

The amount of added utility gained from a one-unit increase in consumption of a good, other things being equal.

Front 4

Diminishing marginal utility-

Back 4

The principle that the greater the consumption of some good, the smaller the increase in utility from a one-unit increase in consumption of that good.

Front 5

Consumer equilibrium-

Back 5

A state of affairs in which a consumer cannot increase the total utility gained from a given budget by spending less on one good and more on another.

Front 6

Equation for consumer equilibrium/ Marginal utility:

Back 6

(Marginal utility of good A/ Price of good A) = (Marginal utility of good B/ Price of good B)

Front 7

Substitution effect-

Back 7

The part of the increase in quantity demanded of a good whose price has fallen that is caused by substitution of that good for others that are now relatively more costly.

Front 8

Income effect-

Back 8

The part of the change in quantity demanded of a good whose price has fallen that is caused by the increase in real income resulting from the price change.

Front 9

For inferior goods, how do the substitution effect and the income effect relate?

Back 9

They work at cross-purposes when the price changes for an inferior good.
- When substitution effect is larger than the income effect for a inferior good, the demand curve for that good will still have a negative slope.
-If the income effect is larger than the substitution effect for an inferior good, there should be a demand curve with a positive slope.

Front 10

Giffen good-

Back 10

An inferior good accounting for a large share of a consumer's budget that has a positively sloped demand curve because the income effect of a price change out weighs the substitution effect.

Front 11

What conditions are required for a positively sloped demand curve?

Back 11

-An inferior good that makes up a large portion of the consumer's budget.

Front 12

Consumer surplus-

Back 12

The difference between the maximum that a consumer would be willing to pay for a unit of a good and the amount that he or she actually pays.

Front 13

Producer surplus-

Back 13

The difference between what producers receive for a unit of a good and the minimum they would be willing to accept.

Front 14

Excess burden of the tax-

Back 14

The part of the economic burden of a tax that takes the form of consumer and producer surplus that is lost because the tax reduces the equilibrium quantity sold.